Q3 2024 Knowles Corp Earnings Call
Speaker Change: At this time, I'd like to welcome everyone to the Novels Corporation, 3rd quarter, 2024, earnings conference call.
Speaker Change: Please note that this call is being recorded. At this time, all participants are an illicit only mode.
Speaker Change: and I'm sure you'll see that after this speaker's remarks, there will be a question and answer session.
Speaker Change: If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star one a second time. I'll now turn the call over to Sarah Cook.
Sarah Cook: Thank you and welcome to our third quarter, 2024 earnings call. I'm Sarah Cook, Vice President of Investor Relations, and presenting with me today our Jeffrey Niew, our President and CEO, and John Anderson, our Senior Vice President and CFO.
Sarah Cook: Our call today will include remarks about future expectations, plans and prospects for noll which constitute forward-looking statements from purposes of the state's Harvard provisions under applicable federal security law.
Sarah Cook: or looking statements in this call will include comments about demand for company products and dissipate trends in company sales, expenses and profits, and involve a number of risks and uncertainties that could cause actual results to different materially from current expectations.
Sarah Cook: The company urges investors to review the risks and uncertainties in the company's SEC filings, including about limited to the annual report on Form 10K for the fiscal year ended December 31, 2023.
Sarah Cook: Periodic reports filed from time to time with the FBC and the risks and uncertainty is identified in today's earnings release.
Sarah Cook: All Ford-looking statements are made as of the date of this call, and no disclaims any duty to update such statements except as required by law.
Sarah Cook: In addition, through a Syringgee, any non-gap financial measures referenced during today's conference call can be found in our press release, post it on our website at nos.com and in our current report on Form 8K filed today with the FCC.
Sarah Cook: This will include a reconciliation to the most irrecually comparable gap measure.
Sarah Cook: All financial references on this call will be in a noun-dance continuing operations basis and on otherwise indicated. We've made selected financial information available in webcast slides which can be found in the investor relations section of our website.
Speaker Change: With that, let me turn the call over to Jeff who provide details on our results. Jeff?
Jeff: Thanks, Sarah, and thanks to all of you for joining us today.
Jeff: Before I move on to the results in detail, I would like to remind you that all financial metrics given on today's call are on a continuing operations basis unless otherwise noted as we signed a definitive agreement in Q3 to sell the consumer, men's, microphone business.
Jeff: The sale will further our strategy for transitioning to cut these portfolio to higher growth markets and products where we have differentiated solutions that drive value for both our customers and shareholders.
Jeff: This position's nose for strong growth in both revenue and earnings in the future.
Jeff: As demonstrated by our third quarter results, our total company adjusted EBITDA margins were 24.6% and as market conditions improved in the PD segment, and we realized the full benefit of synergies from the Cornell acquisition, I expect additional margin expansion.
Jeff: Now try two our results.
Jeff: We continue to deliver our expectations in the third quarter. Revenue of 143 million was at the high end of our guided range, which represents 32% growth on a year-reyear basis, driven by the Cornell acquisition, along with 4% organic growth.
Jeff: EPS of 26 was at the midpoint Marquette Range while cash from operations was 53 million inclusive of CMM, exceeding the high end of our guided range.
Jeff: I do our segment.
Jeff: In Q3, MedTech and specialty audio revenue grew 4% sequentially and 10% on a year over your basis.
Jeff: Our continued operational excellence, sustained success of new product adoption and cutting-edge technology is evidence by our growth in strong margins.
Jeff: The N-Market for our Hearing Health product for Main Strong and we're optimistic about our future.
Jeff: and two three Apple announced software updates that had over the counter-seering in features to the AirPod Pro 2.
Jeff: Over the college year, I need to address my old hearing loss, which is the least penetrated portion of the hearing health market.
Jeff: We believe these features will continue to try hearing loss awareness as users will now have hearing tests readily available that could help them in understanding and recognizing caring loss sooner.
Jeff: This coupled with the potential of eliminating the stigma of using carrying health device could drive a earlier adaption of traditional hearing aids.
Jeff: So, we're expecting the MedTech, especially the audio segment to finish 2024 strong with Q4b new being the highest of the year, driven by normal seasonality from new product launches within the Hearing Health Market.
Jeff: Looking at our precision device segment, in spite of continued headweights and inventory levels, in the industrial markets, and with our distribution partners, Revenue Group 6 per cent, sequentially driven by defense and electrification in markets.
Jeff: On a year over year basis, revenues grew 57% to do the acquisition of Cornell.
Jeff: I am also pleased with the progress we are making on expanding margins as we improve capacity utilization, productivity and pricing.
Jeff: reflecting our ownership of Cornell this past year, I continue to be excited by this acquisition. We have improved our adjusted e-bottom margins 700 basis points throughout the year by accelerating cross-energies, continual operational improvements and increased pricing.
Jeff: We have also instilled a discipline approach to gas deployment leading to increased net operating cash flow.
Jeff: Despite continued challenges in our end markets, Cornell's expected to be a creative and further-year hardship, a significant milestone, and a critical pillar in our acquisition strategy.
Jeff: As I look forward for the full precision development, we expect to see modest, sequential revenue growth in Q4.
Jeff: Well, we have a very healthy pipeline of new opportunities in multiple and markets, which positions us well, for growth at the Marker Recovery in 2025, who will keep continuing to be inconsistent as we have yet to see a sustained recovery in the industrial and market and with our distribution partners.
Jeff: As I noted in the beginning of our call, I am pleased with the signing of the definitive agreement to sell the consumer revs microprone business.
Jeff: As we discussed, our quarterly results demonstrate our expanded margin profile as we continue to focus on more attractive, growing and markets in the MedTech Defense, Electrification in industrial spaces.
Jeff: I am Captain Arabili, developer Cheryl and value as we complete this important step in our evolution to a leading industrial technology company.
Jeff: We expect to close by the end of the fourth quarter and anticipate holding investor form in Q1-2025 when we will discuss our growth strategy and plans for the future in more detail.
Jeff: Now, let me call the attorney call for the John to detail our quarter results and provide Q4 guides.
John: Thanks, Jeff. Please keep in mind all measures that I'll be referencing today are on a continuing operations basis and exclude the consumer mem's microphone business unless specifically stated.
John: We reported 3rd quarter revenue to some 143 million at the high end of the guidance range and up 32% from the year ago period, driven by the acquisition of Cornell in the fourth quarter of 2023 and organic growth to 4%.
John: EPS was 26 sets in the quarter at the mid-point of our guidance range and up to 6 cents or 30% from the third quarter of 2023.
John: In the MedTech and Specialty Audio segment, probably with 64 million, up 10% per cent per year, on higher demand in both hearing health and specialy audio.
John: Gross margins were 53.1% down 60 basis points versus the year ago period, driven by unfavorable product mix and slim slightly lower production yields.
John: The Precision Devices segment delivered revenues of 79 million of 57% from the year ago period.
John: driven by the acquisition of Cornell partially offset by lower shipments of high-performance capacitors into the distribution channel and to OEMs in the industrial and market as customer and channel inventories remain elevated.
John: Shoots into the medical, the fence, and electric vacation markets were off-slightly in in line with expectations.
John: Gross margins were 40% down 40 basis points from a third quarter of 2023. Due to the acquisition of Cornell, partially offset by a 230 basis point improvement in legacy PD margins drew my factory productivity gains.
John: While Gross Margines at Cornell are below our legacy precision device business, we saw 500 basis point, Gross Margin improvement since Q1 of this year, driven by improved factory capacity utilization, supply chain savings and higher pricing.
John: On a total company basis, R&D expands in the quarter was 8.9 million, up 1 million from Q3, 2023 due to the acquisition of Cornell.
John: SGNA expenses were 24 million, 5 million higher than prior levels driven by the acquisition of Cornell, partially offset by restructuring actions taken in the second half of 2023 in the PD segment.
John: Interest expense was up 3.3 million versus the prior year due to higher bank borrowings associated with the acquisition of Cornell in the fourth quarter of 2023.
Speaker Change: Now I'll turn to our balance sheet and catch low.
Speaker Change: In the third quarter, we generated 53 million in cash from operating activities. Above the high end of our guidance range, I'm lower than expected networking capital and higher cash received from settlement of foreign exchange forward contracts.
Speaker Change: For the first nine months of 2024, we generated 95 million in an operating cash flow, representing a 30 million increase over the first nine months of 2023.
Speaker Change: Please note that the cash from operations for the three and nine months at its September 30 is inclusive of the consumer-mounds microphone business.
Speaker Change: Capital Spending was 4 million in the quarter.
Speaker Change: During the third quarter, we repurchased 250,000 shares at a total cost of $4.5 million and reduced outstanding bank borrowings under a revolving credit facility by 38 million.
Speaker Change: We accident the quarter with cash of 93 million and 225 million of debt that includes borrowings under our revolving credit facility and an interest-free seller note issued in connection with the Cornell acquisition.
Speaker Change: Lastly, our net leverage ratio based on trailing 12 months, adjusted E-Mita was one time.
Speaker Change: Moving to our guidance. For the fourth quarter of 2024, Robinos are expected to be between 141 and 151 million. Up 5% versus the year-go period, driven by the acquisition of Cornell.
Speaker Change: Our DE expenses are expected to be between 8 and 9 million and selling at administrative expenses are expected to be with an arranged up 23 to 25 million. Flap with the prior year.
Speaker Change: We're projecting a justice ebit margin for the quarter to be within a range of 21 to 23%. Interest expense in Q4 is estimated to be 3 million and includes non-cash, imputed interest.
Speaker Change: We expected effective tax rate of 9 to 13% for the quarter, which is lower than normal due to the utilization of foreign tax credits.
Speaker Change: We're projecting EPS to be with our range of 26 to 30 cents per share. This assumes weighted average shares outstanding during the quarter of 91.2 million not fully diluted basis.
Speaker Change: We're projecting cash from operating activities to be with an arranged with 30 to 40 million and capital spending is expected to be 6 million.
Speaker Change: Tach from operating activities includes 5 to 10 million used by discontinued operations and capital spending includes 2 million related to discontinued operations.
Speaker Change: In summary, our third quarter results in fourth quarter guidance highlight the margin profile of our continuing operations.
Speaker Change: In addition, our increased exposure to attractive end markets, which include MedTep, Defense, Electrification, and Industrials, is expected to drive higher organic revenue growth rates.
Speaker Change: which we will cover in more detail at our investor forum which is planned for Q1 with 2025. I'll now turn to call back order the operator for the Q&A portion of our call. Operator.
Speaker Change: Thank you. If you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad to raise your hand and join the queue. To withdraw your question, please press star one a second time.
Speaker Change: If you have dialed in and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: I will first question comes from the line of Bob Labbick with CJS. Please go ahead.
Bob Labbick: Good afternoon. Thanks for taking our questions and congratulations on the further transformation of the company.
Bob Labbick: Thanks for all your love
Bob Labbick: I wanted to start with the underlying demand and TD. I think John and your remarks talked a little bit about the end markets, but I wasn't typing fast enough. Maybe you could kind of remind us what you said and then tell us the driver. So what end markets and TD are the strongest right now and what's driving that and where is the weakness that you're seeing and when do you see that kind of recovering?
Speaker Change: Okay, I'll let Bob out. Let me just first do some color to this Jeff. So I went to turn say generally speaking, the defense part gets still looks no pretty okay. You know, I think.
Speaker Change: Obviously, your mom's with defense, there has been and can be in time and time, lumpiness, relative to timing of orders But the underlying demand is still there and I think that's been best ranked
Speaker Change: I think we've definitely seen, especially when you think about our MedTech business in PD, but if you take it all wrong with Winti MSA business
Speaker Change: You know, our MedTech business continues to range strong. I would say specifically in the PD area, we're starting to see the turn back to growth in MedTech in the PD section. I think MSA still been doing very well, but MedTech is still growing. I think you know,
Speaker Change: What I would say to them is, you know, from my perspective, you know, electrification, you know, you know, you...
Speaker Change: He's reading through four overall, he's probably a plat-ish, you know, a year or a year, but the really, he still remains in the industrial, and I would call with our distribution partners, which is a lot of industrial business.
Speaker Change: and so that's kind of like the real weakness that we see is yet yet. You know I say, you know I was with a number of our distributors, we're actually missing those yesterday.
Speaker Change: In their commentary is, you know, too.
Speaker Change: and what we're seeing, which is...
Speaker Change: You know, one month, bookings are good, next month, they're a little weaker than they come back.
Speaker Change: We're just not seeing yet in that portion of the market, but consistency of bookings that we need to really see consistent year over your growth.
Speaker Change: Now what I would say is, you know, I think you were still hopeful that as we get into, you know, you like you wanted to, we just start seeing some recovery, at least that's what some of our contribution partners are talking about. But I think the great thing is, in spite of all these things,
Speaker Change: The PD gross Mars expanded through the year and you know, we expect our opportunity for further expansion first with the center of ease and the things we're doing on the Cornell side but also I'm pass the utilization relative to the traditional PD business that is not that Cornell.
Speaker Change: Obviously, with the transformation, you're going to probably be a little more asset light. You may have told us previously, because you were a minus, kind of go forward level of catbacks.
Speaker Change: Poor.
Speaker Change: and of course.
Speaker Change: or me, too. Yes, sure, Bob, I would say, you know, over a cycle kind of 3% of revenue range, 3%
Speaker Change: Yeah, I think like if you look at this, could get if we had some expansion in an area you could have a period where it's a little above that, but I think overall over a cycle 3% of our cycle. And there could be a year or slightly lower and then you guys were slightly over, you know, but you know, probably 2 to 4 to 4 an amp per cent depending on you know where we are in cycle 20 24 will probably be a little under the 3% percent correct.
Speaker Change: Okay, got it great. And then last one I'll jump back and cue here, but obviously, you know...
Speaker Change: This is kind of, you know, just to be kidding. So to speak, he's not quite the M&A environment, you know, for you right now in the characteristics of targets and you know, how long it'll take you to kind of get back out and looking at things or, you know, or what's out there now.
Speaker Change: I did a great question, thanks for having to get to a core portion of our strategy going forward, in terms of finding opportunities like Cornell where there's good synergies with what we do.
Speaker Change: I would say, you know, we have a number of opportunities in front of us that we're assessing right now. I mean, it's always hard to say, you know, when that's going to come to fruition.
Speaker Change: We are going to be very selective in what we do. We don't want to do something that we come out to the street, but think which doesn't make sense.
Speaker Change: So we're being very careful, we do. I would just add one thing that we are very pleased about, you know, that I think helps really the emanate story, which is, you know, it's very clear for us with all the transformation we've done into a higher margin business.
Speaker Change: You are multiple, it is expanding and I think that gives us more options.
Speaker Change: Relative to acquisitions, even that old. Our EBITDA multiple is expanding. And so it gives us more options with Emanage. And so, to make things a lot faster, I don't have a multiple EBITDA basis.
Speaker Change: So I think this is very critical to our future and we have a lot of resource being put into this. You know, I can't, you know, definitively say, one something happens. We are on the hunt right now. I mean, we are looking.
Speaker Change: Got it. Okay, super. Thanks so much.
Speaker Change: Our next question comes from the line of Christopher Roland with Seth Guajana. Please go ahead.
Christopher Roland: Hey guys, thanks for the question. I guess my first one is...
Christopher Roland: Cornell, that's pretty amazing, a margin expansion that you have there.
Christopher Roland: I was wondering, do you still have continued to opportunities?
Christopher Roland: I'd also love to focus a little bit on pricing there. Do you think you still have movement upwards in pricing? Is there something left here in terms of margin improvement that we could see for the CDBIS?
Speaker Change: Let me handle the pricing first and I'll let John talk just gently to the margins overall. So, you know, if you remember when we went through this, I think...
Speaker Change: Don't want me to say exact numbers. When we first announced the deal, we didn't really talk to much about price. By the end of the first quarter of owner, we kind of talked about a couple million dollars of price, I think.
Speaker Change: Last quarter I talked about three to four million of price. I think we're going to be for the year above five million dollars of price that we're going to get this year.
Speaker Change: and if you look at the timing of price, we have longer-term contracts with customers, we have there's a lot of inventory in the channel relative to the industrials. So there's going to be based on the pricing actions we've already taken.
Speaker Change: There's going to be more price in 2025.
Speaker Change: So I would say 5 million this year.
Speaker Change: may be another couple million next. So, you know, a big portion of the margin improvement is coming from price.
Speaker Change: I'd say the second thing, John can kind of expand on this, but we really haven't done a tremendous amount yet.
Speaker Change: on like what I call value creation in on the manufacturing floors with with.
Speaker Change: with Cornell. That process will take a...
Speaker Change: started next year. We'll start working on that. We'll start playing that out. But I think there's also opportunity to do the things that we do in the traditional null business, whether it be PD or the MSA business where we get a fair amount of value creation every single year.
Speaker Change: So, you know, I would say I'm reasonably confident that we're going to have more margin expansion. It will talk more about the investor date. You'll overall for the PD segment, what kind of margin expansion that we can get. But we should get more from Cornell. I don't know, John, do you need to look for? I just, I think.
Speaker Change: just to generate a red-witch up setting. We had 500 basis points of improvement.
Speaker Change: in Cornell and it was really driven by improved pricing. Also to a lesser extent, we're getting some supply chain savings, material savings. So that's there. I think that will continue into 25. And then also we're planning on getting the major sites on our Oracle instance.
Speaker Change: Once we get that, there's some also call it op-acid or Jesus to harvest from that. So there's room for increased margin in that corner. I think what I just would highlight here is the last thing on the price.
Speaker Change: is obviously, you know, this has been a relatively challenging year for the P.D. second as a whole in terms of revenue, especially the industrial market. And we're still getting $5 million of price in the year. And I think that's a full really well for, at the market, recovery, what it means.
Speaker Change: Thank you Jeff and yeah, I did as it lead in one to talk a little bit more industrial.
Speaker Change: So, it sounds like there might be some inventory there, would love to know when you think that normalizes how much inventory is there.
Speaker Change: and then if you could break this up into what you're seeing geographically like East versus West, I know there's a debate over EVs, for example, China EVs look good, West and EVs look a little soft.
Speaker Change: and anything like that would be helpful.
Speaker Change: [inaudible]
Speaker Change: Yeah, so, you know, I think our best indicator, you know, quite frankly, of inventory, it's really hard with, a little harder with OEMs or direct customers to really know the exact amount of inventory, but with our distribution partners, you know, we get, we have a pretty good view into the inventory that they have.
Speaker Change: We still believe, based on the data they're reporting to us, that our distribution has about six months' worth of inventory on hand right now. In order to really get back to normal ordering patterns, that's still got to come down by about three months.
Speaker Change: Now, you know, when that happens, again, as I kind of said on the earlier question,
Speaker Change: you know, when you meet or just distribute your partners, they say one month's good, one month's poor. It's been inconsistent, right? Hasn't been.
Speaker Change: all just totally horrible, but it's been inconsistent.
Speaker Change: Europe, there isn't as much business in our PD segment in the industrial markets
Speaker Change: in Asia. It's not as much. Specific to electrification, now that's really not China, but we do have Asian customers. We are not doing a tremendous amount of electrification in China. I would say we're doing, and that again,
Speaker Change: Right now in the back half the year, you're looking at this
Speaker Change: It's flattish year-over-year in terms of, because what I'd say is, yes, the electrification market is weak, as you kind of pointed out, but we also have new design wins going into production. We are, you know, garnering new opportunities that are starting production. So that's kind of offsetting, you know, being down in electrification, even though, you know, we're not participating as heavily in China.
Speaker Change: Awesome, thank you.
Speaker Change: Again, if you would like to ask a question, please press star one.
Speaker Change: Our next question comes from the line of Tristan Guerra with Baird. Please go ahead.
Tristan Guerra: The first question is, have you seen in other end markets, including consumer,
Tristan Guerra: Any changes in demand patterns over the past few months or is it is it stable?
Speaker Change: and also if you could talk about pricing.
Speaker Change: excluding the impressive progress you're making at Cornell. Are you seeing any unusual pricing changes in the high-end capacitors? What are you hearing from your customers?
Speaker Change: as you perhaps renegotiate some annual pricing contracts there.
Speaker Change: Yeah, so first, I'll just make a comment. Obviously, we've moved the CMM business to discontinued apps, and that's our exposure to consumer until obviously that is fully
Speaker Change: sold. That is in line with our expectation going into the quarter, you know, and as I look even into Q4, it's running in line with expectation. I think it's doing fine. You know, so I think there aren't any big issues we see in consumer at this moment.
Speaker Change: Now, yes, about the pricing environment, within, first within MSA, you know, I would say stable, that's what I would say. We're not seeing a tremendous amount of pricing increases, but we're not seeing pricing reductions either that, you know, that are pointing to any, you know, any issues.
Speaker Change: And then in PD, which is primarily ceramic capacitors, which is a lot of end markets, and then RF, which is primarily defense.
Speaker Change: I would actually say, in defense, there is, we still think, some opportunity in terms of price in the RF market going forward, and then in the traditional cap space, I would say it's stable. We are, you know, I think one of the benefits we have in our businesses
Speaker Change: is that a big portion of our businesses in PD is sole source positions. And so I think we're in long-term contracts with a lot of people, and we don't see a tremendous amount of price pressure in these markets, even at a down market.
Speaker Change: Great, that's great to hear.
Speaker Change: Yeah, okay. Let me think, I think we'll look at these on a sequential basis. You know, we're expecting, but first let me say for PD overall, you know, I kind of said on the prepared remarks.
Speaker Change: We're expecting modest sequential growth, right? You know, and so if I look at the end markets overall, defense is going to be up Medtech is going to be up
Speaker Change: Electrification is flat.
Speaker Change: and Industrialist Platt.
Speaker Change: Right, you know, so so, you know again go back to my kind of points about industrial and distribution, which is a lot of industrial customers
Speaker Change: It's not like we're seeing a degradation sequentially, but you know, obviously these numbers were running a lot higher if you go back, you know, a year and a half ago. So we're just not seeing the continued improvement that we kind of saw. We did see some improvement from...
Speaker Change: Q2 to Q3 in the industrial market, but that's kind of like now back to flat sequentially from Q3 to Q4.
Speaker Change: Great, thank you very much.
Speaker Change: Thank you.
Speaker Change: There are no further questions at this time. This will conclude today's conference call. Thank you all for your participation. You may now disconnect.